Directors Report 2019
The financial statements have been prepared in accordance with IFRS. All figures relate to the Group. Figures in brackets refer to the corresponding period last year.
AREAS OF OPERATION AND MARKETS
Sparebanken Møre is an independent financial group that consists of the Parent Bank, the mortgage company Møre Boligkreditt AS, the estate agency Møre Eiendomsmegling AS, and the property company Sparebankeiendom AS.
Sparebanken Møre has defined its geographic area of operation as Nordvestlandet, where the Bank had 28 branches in 24 municipalities (16 municipalities in Sunnmøre, six in Romsdal and two in Nordmøre) at the end of 2019. Its head office is in Ålesund.
Sparebanken Møre offers a full range of financial services within the following areas:
- Deposits and other forms of investments
- Asset management
- Financial advisory services
- Money-transfer services
- Currency and interest rate trading
- Real estate brokerage
STRATEGY AND GOALS
Sparebanken Møre shall be an independent bank that is the first choice for retail customers and small and medium-sized enterprises in Nordvestlandet. The Bank shall also be an attractive partner for larger companies and the public sector.
Sparebanken Møre shall attract the best partners and suppliers via a business strategy based on the contract banking principle. This means that the Bank can choose to operate and develop on its own, or with partners and suppliers where this is deemed to be the best solution for customers and the Bank.
The Bank’s goal is to have the most qualified employees and managers, and clear competence requirements are set for each individual employee. The Bank also takes a systematic approach to recruitment and the development of managers and employees.
Good interaction between the Bank’s branches, digital channels, specialist functions and customer service is designed to ensure that the Bank provides a high quality customer experience.
The financial targets for the strategy period 2019-2023 are a return on equity of more than 11 per cent and a cost income ratio of less than 40 per cent. The goal is also to achieve a lower level of losses than the average for Norwegian banks.
KEY FIGURES FOR 2019
The Sparebanken Møre Group delivered a solid result in 2019 and the Board of Directors is pleased with the Bank’s development and results.
Group’s key figures
(Comparable figures for 2018 in brackets)
- Profit after tax: NOK 711 million (NOK 605 million)
- Return on equity after tax: 11.7 per cent (10.6 per cent)
- Lending growth in the last 12 months: 6.1 per cent (6.1 per cent)
- Deposit growth in the last 12 months: 6.9 per cent (4.9 per cent)
- At year end, the primary capital amounted to NOK 6.9 billion and represented 21.5 per cent of the basis for calculation. Consequently the Tier 1 capital ratio was 19.3 per cent and the Common Equity Tier 1 capital ratio was 17.4 per cent.
- Earnings per equity certificate: NOK 34.50 (NOK 29.60)
- The Board of Directors recommends that the General Meeting pays a cash dividend of NOK 17.50 per equity certificate and sets aside NOK 176 million for dividend funds for local communities. In total, this represents around 51 per cent of the total group profit for 2019.
Parent Bank’s key figures
(Comparable figures for 2018 in brackets)
- Profit after tax: NOK 661 million (NOK 580 million)
- At year end, the primary capital amounted to NOK 6.7 billion and represented 22.4 per cent of the basis for calculation. Consequently the Tier 1 capital ratio was 20.0 per cent and the Common Equity Tier 1 capital ratio was 17.9 per cent.
- Earnings per equity certificate: NOK 32.00 (NOK 28.35)
Moderate economic expansion
The moderate economic expansion in the Norwegian economy continued in 2019. According to Statistics Norway’s calculations, GDP grew by 2.5 per cent in Mainland Norway last year. This was due to higher activity in both the private and the public sector. The upturn in production and demand has led to lower unemployment. At the end of December last year, 2.2 per cent of the workforce in Norway were unemployed.
Total credit growth from domestic sources (K2) fell slightly over the year and was at 5.6 per cent in November 2019. The growth in credit for households was 5.2 per cent while for non-financial companies it was 6.2 per cent. House prices continued to rise at a moderate pace.
Key policy rate
Norges Bank raised its key policy rate three times last year to 1.50 per cent. The most important reasons for this were the high levels of demand in the Norwegian economy and the weak NOK exchange rate. According to the central bank’s latest interest rate forecasts, published in December 2019, the key policy rate will remain unchanged in 2020.
Developments in the financial markets
Deposits are the most important source of financing for the Group. The deposit-to-loan ratio of 57.5 per cent as at 31 December 2019 is high and helps both reduce Sparebanken Møre’s dependence on the financial markets and protect net interest income during a period of interest rate rises. The capital markets functioned well throughout 2019 and Sparebanken Møre has had good access to competitive financing, not only in the form of deposits but also through the issue of senior debt and covered bonds. There has been a focus on diversifying sources of financing in recent years and in early October last year, Møre Boligkreditt AS placed its third successful semi benchmark Public Issue of EUR 250 million in the European market.
The annual financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as established by the International Accounting Standards Board and approved by the EU as at 31 December 2019.
Net interest income
Net interest income totalled NOK 1,314 million (1,179 million) or 1.79 per cent (1.70 per cent) of average total assets. Net interest income accounted for 81.8 per cent of total income in 2019.
Over the course of the year, rising interest rates led to increased funding costs and slightly reduced margins on lending. The interest rate hikes implemented in 2019 kept the lending margin at year end 2019 at about the same level as at year end 2018. The margin for deposits increased in the same period and, overall, this improved net interest income in 2019 compared with 2018.
In addition to this, higher lending and deposit volumes, as well as better interest contributions from the Bank’s equity, increased net interest income in NOK compared with last year.
Strong competition in both lending and deposits, and reduced risk in the lending portfolio, have contributed to downward pressure on net interest income.
In the retail market, the lending margin decreased and the deposit margin increased compared with 2018. The lending margin in the corporate market was unchanged, while the deposit margin has increased slightly.
Other operating income
Other operating income was NOK 293 million in 2019 (0.40 per cent of average total assets). This is an increase of NOK 45 million compared with 2018.
Capital losses from bond holdings were NOK 9 million, compared with losses of NOK 19 million in 2018. Capital gains on equities were NOK 16 million, compared with NOK 10 million in 2018. Income from other financial investments increased by NOK 17 million compared with 2018.
Other operating income increased by NOK 12 million compared with 2018.
Total costs were NOK 646 million, which is NOK 39 million higher than in 2018. Personnel costs increased by NOK 14 million compared with 2018 and were NOK 354 million. Financial activity tax in the form of higher employers’ National Insurance contributions was NOK 15 million in 2019, NOK 1 million higher than in 2018. Staffing has been reduced by 4 full-time equivalents in the last 12 months to 357 FTEs. Other operating costs were NOK 25 million higher than in 2018.
The cost income ratio was 40.2 per cent for 2019. This represents a decrease of 2.3 percentage points compared with 2018.
In 2019, the income statement was charged with NOK 50 million (NOK 16 million) in losses on loans and guarantees. This amounts to 0.07 per cent of average total assets (0.02 per cent).
At year end 2019, total expected losses were NOK 375 million, equivalent to 0.57 per cent of loans and guarantees (NOK 338 million and 0.55 per cent). NOK 24 million of the impairments were linked to commitments in default for more than 90 days (NOK 31 million), which amounts to 0.03 per cent of loans and guarantees (0.06 per cent). NOK 351 million relates to other commitments (NOK 307 million), which is equivalent to 0.54 per cent of gross loans and guarantees (0.49 per cent).
Net doubtful commitments (total commitments in default above 90 days and other credit-impaired commitments not in default) have increased by NOK 478 million in the last 12 months. At the end of 2019, the corporate market accounted for NOK 650 million of net doubtful commitments, and the retail market NOK 86 million. In total, this represents 1.12 per cent of gross loans and guarantees (0.42 per cent).
Total assets increased by NOK 3,835 million, or 5.4%, in 2019 to NOK 74,875 million as at 31 December 2019. The change in total assets is primarily attributable to an increase in lending.
Lending to customers
At year end 2019, lending to customers amounted to NOK 64,029 million (NOK 60,346 million). Customer lending has increased by a total of NOK 3,683 million, or 6.1 per cent, in the last 12 months. Retail lending has increased by 4.5 per cent, while corporate lending has increased by 9.8 per cent in the last 12 months. Retail lending accounted for 68.4 per cent of lending at year end 2019 (69.2 per cent).
Deposits from customers
Customer deposits have increased by NOK 2,389 million, or 6.9 per cent, in the last 12 months. At year end 2019, deposits amounted to NOK 36,803 million (NOK 34,414 million). Retail deposits have increased by 5.1 per cent in the last 12 months, while corporate deposits have increased by 10.2 per cent and public sector deposits have decreased by 0.4 per cent. The retail market’s relative share of deposits amounted to 58.9 per cent (59.9 per cent), while deposits from the corporate market accounted for 39.0 per cent (37.9 per cent) and from the public sector market 2.1 per cent (2.2 per cent).
The deposit-to-loan ratio was 57.5 per cent at the end of 2019 (57.0 per cent).
Holdings of investments in securities (the LCR portfolio plus the surplus liquidity portfolio) at year end 2019 amounted to NOK 6,938 million compared with NOK 6,789 million at year end 2018. The volume of the portfolio is generally tailored to the LCR requirement, but also the Bank’s overall liquidity situation.
The Bank had no significant trading portfolio at year end 2019.
The Bank’s additional Tier 1 capital consists of two loans totalling NOK 600 million. Both loans are subject to variable rates.
PROPOSED ALLOCATION OF THE PROFIT
In line with the rules for equity certificates, etc., and in accordance with Sparebanken Møre’s dividend policy, it is proposed that 50.7 per cent of the Group’s profit allocated to equity certificate holders be set aside for cash dividends and dividend funds for local communities. Based on the accounting breakdown of equity in the Parent Bank between equity certificate capital and the primary capital fund, 49.6 per cent of the profit will be allocated to equity certificate holders and 50.4 per cent to the primary capital fund. The earnings per equity certificate in the Group were NOK 34.50 in 2019. The recommendation to the General Meeting is that the cash dividend per equity certificate for the 2019 financial year be set at NOK 17.50.
Proposed allocation of profit (figures in NOK millions):
|Profit for the year
|Share allocated to AT1 instrument holders
|Dividend funds (50.7 %):
|To cash dividends
|To dividend funds for local communities
|Strengthening equity (49.3 %):
|To the dividend equalisation fund
|To the primary capital fund
|To other funds
Retail Banking Division
In 2019, Sparebanken Møre consolidated its position as the leading bank for retail customers, clubs and associations in Nordvestlandet. The Bank gained about 8,000 new retail market customers in 2019, with the growth being particularly strong in its priority market areas.
Lending to the retail market increased by NOK 1.9 billon from the same period last year to a total of NOK 43.8 billion. Deposits grew by 5.1 per cent, with deposits from retail customers totalling NOK 21.7 billion at the end of the year. Retail customers account for 58.9 per cent of deposits.
Sparebanken Møre attaches great importance to external activities that focus on customers. Expert advisers combined with products that are well-suited to meeting customers’ needs made important contributions to creating good customer experiences. All employees who advise customers must complete their FinAut authorisation programmes. They must also undergo continuous refreshers in market developments, systems training and training in providing good customer advice. The Bank also has a product committee that assesses new and existing products to ensure that they are suitable for the needs of customers.
Customers are increasingly serving themselves and performing most of the simple banking services in the online or mobile bank. This gives us a great opportunity to spend time and resources on providing good advice to customers when they need it. The demand for advice remains high, and young first-time buyers and customers with complex family situations especially are seeking advice.
The Bank worked systematically throughout the year to ensure customers have good customer experiences when they contact us, and in 2019 Sparebanken Møre made it all of the way to the top and was named Norway’s best customer service in the bank category. The Bank’s own service quality survey also showed record customer satisfaction among retail market customers in 2019.
Availability and expertise are important priority areas for the Bank, and this work will be continued with full force in 2020.
Corporate Market Division
The Corporate Banking Division is the largest financial services environment for business in Nordvestlandet and in 2019 it strengthened its market position through good growth in both the lending and investment markets.
Lending to the corporate market increased by just over NOK 1.7 billion to a total of NOK 19.7 billion, which represents growth of 9.6 per cent. The growth in deposits was very good and ended the year at 10.2 per cent with deposits from corporate customers totalling NOK 14.3 billion.
The largest individual industries measured in terms of lending were commercial real estate and fisheries. The quality of the portfolio is considered good, and losses remain low.
The growth in new customers is increasing, and in 2019 about 500 new business customers chose to establish an active customer relationship with Sparebanken Møre. The majority of these were companies in the SME segment.
All account managers in the Corporate Banking Division are authorised financial advisers and must pass annual tests to renew their authorisation. The Bank also strives to ensure it has solid, relevant industry knowledge in order to improve the employees’ advisory skills.
In parallel with improving the adviser’s skills, there is a focus on digitalising both internal processes and better self-service solutions in order to simplify processes for customers with respect to customer and product establishment, as well as efficient, digitalised, self-service credit solutions. This will help ensure that the Bank’s account managers can give even greater priority to direct customer contact with advice that provides added value to customers.
EPSI’s recent customer satisfaction survey shows that Sparebanken Møre is one of the banks with the most satisfied business customers. Local presence, a focus on the customer and short decision-making paths are important factors behind this. The Bank’s own service quality survey confirms the positive trend in the corporate area with customer feedback indicating greatly improved customer satisfaction in 2019.
Sparebanken Møre’s investment firm licence is administered by Treasury and Markets, where the Treasury department follows up services related to financing and management for the Group, while the Markets department manages the customer-oriented services through customer trading in foreign exchange, interest rates and shares, as well as Discretionary Asset Management service.
Sparebanken Møre must aim for low to moderate overall risk in the activities of the Bank and the Group. Earnings should be a product of customer-related activities, and not financial risk taking, and the Bank’s market risk must be low.
The section’s customer-oriented services generated income of NOK 105.5 million in 2019, which represented 36 per cent of the Bank’s other operating income in 2019 and an increase of about 10 per cent compared with 2018. Currency and fixed income trading, as well as Discretionary Asset Management, are the most important income areas. After deducting costs, the income is allocated to the customer centres in the Corporate Banking Division and the Retail Banking Division.
The aggregate profit of the Bank’s three subsidiaries was NOK 222 million after tax in 2019 (NOK 177 million).
Møre Boligkreditt AS
Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The main purpose of the mortgage company is to issue covered bonds for sale to Norwegian and international investors. At year end 2019, the company had net outstanding bonds of NOK 23.1 billion in the market; almost 34 per cent of the borrowing was in a currency other than NOK. The company contributed NOK 222 million to the result in 2019 (NOK 174 million).
Møre Eiendomsmegling AS
Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 0.8 million to the result in 2019 (NOK 1 million). At year end, the company employed 13 full-time equivalents.
Sparebankeiendom AS’s purpose is to own and manage the Bank’s commercial properties. The company contributed NOK -1.1 million to the result in 2019 (NOK 2 million). The company has no employees.
CORPORATE GOVERNANCE REPORT
Corporate Governance in Sparebanken Møre includes the aims, targets and overall principles in accordance with which the Group is managed and controlled for the purpose of safeguarding the interests of owners, depositors and other groups in the Group. The Group’s corporate governance should ensure prudent asset management and provide assurance that the communicated goals and strategies are attained and realised.
The Board highlights the following areas as critical to maintaining the confidence of the market:
- Capital appreciation for equity certificate holders and other investors in the Bank’s securities
- Competent and independent management and control
- Good internal management and monitoring processes
- Compliance with laws and regulations
- Transparency and good communications with equity certificate holders, other investors, customers, employees and the community at large
- Equal treatment of all equity certificate holders
The Group’s corporate governance is based on the Norwegian Code of Practice for Corporate Governance, most recently updated on 17 October 2018. Sparebanken Møre’s corporate governance report is included in the annual report as a separate section.
RESEARCH AND DEVELOPMENT
The Bank takes a systematic approach to various development projects where the purpose is to provide improved products and services for customers, or to help streamline and enhance the quality of internal work processes.
Some of the projects are carried out in collaboration with partners, including through the establishment of the TEFT-lab at NTNU in Ålesund.
The Group does not carry out its own research activities beyond this, but is a strong contributor to R&D activities in Nordvestlandet via science parks and industry clusters.
CAPITAL ADEQUACY RATIO AND APPLICABLE REGULATIONS
The EU’s capital requirements regulation and directive (CRR/CRD IV) came into force in Norway on 31 December 2019. These meant, among other things, that the capital requirements for lending to small and medium-sized enterprises (SMEs) were reduced and that the Basel I floor was repealed. The Ministry of Finance has decided that the system risk buffer for financial institutions that use the advanced IRB method should be increased to 4.5 per cent from 31 December 2020. The change will come into effect from 31 December 2022 for other institutions. The Ministry of Finance has previously decided that the countercyclical buffer will be increased to 2.5 per cent from 31 December 2019.
Based on the capital adequacy regulations, the minimum requirement for capital adequacy consists of a Pillar 1 requirement and a Pillar 2 requirement. The Pillar 2 supplement applies to risks that are not covered or are only partly covered by Pillar 1. The Financial Supervisory Authority of Norway has set the Bank’s Pillar 2 requirement at 1.7 per cent, applicable from 31 March 2019. The represents a decrease of 0.1 percentage points compared with the Financial Supervisory Authority of Norway’s previous decision. The next time it sets the Pillar 2 requirement, the Financial Supervisory Authority of Norway will also express its expectation concerning a capital requirement margin (P2G) in excess of the total risk-weighted capital requirement.
For Sparebanken Møre, the total minimum requirement for the common equity Tier 1 capital ratio amounted to 14.2 per cent as at 31 December 2019.
Sparebanken Møre has authorisation from the Financial Supervisory Authority of Norway to use the Foundation IRB method for calculating capital requirements for credit commitments.
Operational risk calculations are performed using the basic method.
Sparebanken Møre’s capital adequacy at year end 2019 was well above the regulatory capital requirements and the internally set minimum target for the common equity Tier 1 capital ratio of 15.2 per cent. Primary capital was 21.5 per cent (19.6 per cent), core capital 19.3 per cent (17.6 per cent) and common equity Tier 1 capital 17.4 per cent (16.0 per cent). The capital adequacy figures include the annual profit and the Board’s proposed allocation of the profit. The Board’s proposal concerning the allocation of profit for the year entails retaining 49 per cent of the Group’s profit to further build up the Group’s financial strength.
The minimum requirement for the leverage ratio has been set at 3 per cent. Every bank must also have a buffer of at least 2 per cent. At year end 2019, the leverage ratio for Sparebanken Møre was 8.0 per cent (8.1 per cent), which represents a good margin with respect to the total requirement of 5 per cent.
The Board monitors capital adequacy in the Group on an ongoing basis and is prepared to rapidly deploy measures in the event of a need to strengthen capital balances.
Risk-taking is a fundamental element of banking operations. Risk management and risk control are two of the Board’s focus areas. The overall purpose of risk management and risk control is to ensure that set targets are attained, ensure effective operations, manage risks which may prevent the attainment of commercial targets, ensure high quality internal and external reporting, and ensure that the Group’s operations comply with all relevant laws, regulations and internal guidelines.
The stated goal of the Board of Sparebanken Møre is to ensure that the operations of the Group maintain a low to moderate risk profile. Earnings should be a product of customer-related activities, and not financial risk taking. Sparebanken Møre constantly strives to maintain control of the risks that exist. In those cases where the risk is deemed to exceed an acceptable level, immediate steps will be taken to reduce this risk.
The overall framework and limits for Sparebanken Møre’s risk management are assessed annually by the Board as part of the preparation of the Bank’s strategic plan. In August 2019, the Board adopted a new strategic plan, “Møre 2023”. The Board approves overall guidelines for management and control in the Group each year, and the Parent Bank and subsidiaries adopt individual risk policies tailored to their activities. Separate policies have been approved for each significant risk area, including credit risk, counterparty risk, market risk, concentration risk, operational risk and liquidity risk. Risk strategies are approved by the Board and reassessed at least once a year, or when particular circumstances make it necessary.
The various policies form the framework for the Group’s ICAAP. The Board actively participates in the annual process and establishes ownership of the assessments and calculations made, including through the ICAAP’s key role in long-term strategic planning. The ILAAP process, which is the Bank’s assessment of liquidity and funding risk, is included as part of the ICAAP. Calculations performed in ICAAP 2019 indicate that the Group’s capital adequacy is sufficiently robust to tolerate an economic development that is significantly more negative than the development on which the basic scenario in the long-term strategic plan is based. This is supported by both economic calculations and simulations based on various stress tests.
Sparebanken Møre has established a monitoring and control structure that is intended to ensure compliance with the overall framework of the Bank’s strategic plan. The Group’s risk exposure and risk development are followed up on an overall basis through periodic reports submitted to the executive management team, Risk Committee and the Board of Directors. One of the Risk Committee’s primary purposes is to ensure that Sparebanken Møre’s risk management is addressed satisfactorily.
The Board is of the opinion that Sparebanken Møre’s aggregate risk exposure conform to the Group’s targeted risk profile. The Board considers the Group’s and Bank’s risk management to be satisfactory.
Credit risk (or counterparty risk) is the risk of losses associated with customers or other counterparties being unable to fulfil their obligations at the agreed time pursuant to written agreements, and of received collateral not covering outstanding claims.
Credit risk also encompasses concentration risk, including risk linked to major commitments with the same customer, concentration within geographic areas or industries or with similar groups of customers.
Credit risk represents Sparebanken Møre’s biggest risk area. The Group has a moderate risk profile for credit risk, as this risk is defined through the Group’s credit risk strategy. The strategy provides, for example, limits for concentration in industrial sectors and the size of commitments, geographic exposure, growth targets and risk levels.
Compliance with the Board’s resolutions within the area of credit is monitored by the Bank’s Risk Management & Compliance Section, which is independent of the customer divisions. The Board receives reports on credit risk trends throughout the year in monthly risk reports. In addition, periodic reviews of the credit area are carried out by the Audit Committee and the Risk Committee. The Board receives quarterly reports on mortgage lending, in line with the guidelines of the Financial Supervisory Authority of Norway. Sparebanken Møre’s internal guidelines conform to the Financial Supervisory Authority of Norway’s guidelines for mortgage lending.
Sparebanken Møre has, as part of the IRB system, developed its own risk classification models for classifying customers:
- Probability of Default (PD) is used as an indicator of quality. Customers are classified in a risk class according to the probability of default.
- Exposure At Default (EAD) is a calculated amount which includes drawn commitments or lending, loan commitments, and a proportion of approved, undrawn facilities.
- Loss Given Default (LGD) indicates how much the Group would expect to lose if the customer defaulted on his obligations. The models take account of the collateral that the customer has pledged, future cash flows and other relevant factors.
These models make an important contribution to the in-house management of credit risk. The customers are scored on a monthly basis, and this provides the basis for ongoing monitoring of the development of Sparebanken Møre’s credit risk. Specific application scoring models are used in the credit approval process.
Through the Group’s reporting portal, each member of staff with customer responsibilities has access to reports which show the development of the credit risk in his or her portfolio. The portal has a hierarchical structure allowing managers in Sparebanken Møre to monitor performance within their respective area of responsibility. The reporting is used to analyse customers, portfolios and segments, among other things. The portal also provides customer account managers with an overview of the customers’ positions and limits in relation to exposure in financial instruments.
The Special Commitments Department is part of Risk Management & Compliance. The purpose of this department is to improve the efficiency of the processes associated with losses and commitments in default. This will improve the quality and professionalism in handling impaired commitments, and ensures that case processing will be objective and independent. The department reports upwards in the management hierarchy independent of the line.
The Board finds that Sparebanken Møre’s overall credit risk is within the Group’s adopted risk tolerance. Exposure to large commitments is well within the adopted limits and the follow-up and control of this area is good. The Board finds that Sparebanken Møre is well prepared to handle any increased credit risk in the loan portfolio, and that the Group has a good foundation for increasing its focus on solid lending projects in Sparebanken Møre’s area of operation in the future.
Sparebanken Møre’s market risk is primarily a reflection of activities which are conducted in order to support the Group’s daily operations. This relates to the Group’s funding, the bond portfolio which is maintained in order to meet funding needs and safeguard access to loans from Norges Bank, as well as customer-generated interest rate and foreign exchange trading.
The Board stipulates limits for Group market risk in the market risk strategy. The limits are monitored by Risk Management & Compliance. The limits are established based on analyses of negative market movements. Based on an evaluation of risk profile, management and control, it is assumed that the Bank accepts low risk within the market risk area. The control and management documents which deal with market risk are reviewed and renewed at least annually by the Board. The Bank’s Board receives monthly reports on the development of market risk. The limits for market risk are conservative, and on an overall basis, market risk represents a small part of the Group’s aggregate risk.
The Board finds that the Group’s risk exposure in the area of market risk is within the adopted risk tolerance limits.
The management of Sparebanken Møre’s funding structure is laid down in an overall funding strategy which is evaluated and approved by the Board at least once a year. The strategy reflects the moderate risk level that is accepted for this area of risk. It describes Sparebanken Møre’s targets for maintaining its financial strength. Specific limits have been defined for different areas of the Group’s liquidity management. Sparebanken Møre’s recovery plan includes a description of how the funding situation should be handled in turbulent financial markets.
Two key quantitative requirements have been established for liquidity:
- Requirement for liquidity coverage under stress: Liquidity Coverage Ratio (LCR)
- Requirement for long-term stable funding: Net Stable Funding Ratio (NSFR)
LCR measures an institution’s ability to survive a 30-day stress period. LCR increases the importance of high-quality liquid assets. NSFR measures the longevity of an institution’s funding.
NSFR means that institutions have to fund liquid assets with the aid of a greater proportion of stable and long-term funding.
The LCR requirement is 100 per cent. The LCR target established by the Group complies with the regulatory requirement and the reporting shows that Sparebanken Møre has a good margin in relation to the requirement.
A stricter liquidity requirement generally entails a significant interest cost for the Bank. It also makes the Bank more vulnerable to changes in credit spreads.
To ensure that the Group’s funding risk is kept at a low level, lending to customers must primarily be financed by customer deposits and issuing long-term debt securities. The Bank’s deposit-to-loan ratio at the end of 2019 was 57.5 per cent.
Møre Boligkreditt AS increases the diversification of the Group’s sources of funding. The company issues covered bonds. The Bank transfers parts of its mortgage portfolio to the mortgage company, and this facilitates access to these funding opportunities. At year end 2019, around 40 per cent of the Group’s total lending (58 per cent of lending to the retail market) had been transferred to the mortgage company. Sparebanken Møre will continue to transfer loans to Møre Boligkreditt AS in accordance with the plans set out in the funding strategy. At year end, 83 per cent of Møre Boligkreditt AS’s outstanding bond volume was for an amount that qualifies for Level 2A liquidity in LCR. Møre Boligkreditt AS will issue and accumulate more loans in this category going forward.
In order to gain access to new sources of financing and seek stable access to funding from external sources, securities issued by both Sparebanken Møre and Møre Boligkreditt AS are rated by the rating agency Moody’s.
In December 2019, Moody’s upheld its good A2 rating of Sparebanken Møre. Bonds issued by Møre Boligkreditt AS are rated Aaa by Moody’s.
As far as the composition of the external funding is concerned, priority is given to ensuring that a relatively high proportion of funding has a term in excess of one year. Total market financing ended at net NOK 29.7 billion at year end – almost 90 per cent of this financing has a remaining term of more than one year. The Parent Bank’s outstanding senior bonds, with a term of more than one year, had a weighted remaining term of 1.92 years at year end 2019, while covered bond funding correspondingly had a remaining term of 4.01 years.
The liquidity risk module consists of guidance for the Financial Supervisory Authority of Norway’s assessment of the institution’s liquidity risk level and guidance concerning the assessment of the institution’s system for the management and control of liquidity risk. Sparebanken Møre has implemented the proposed reporting structure from the module in the management report linked to liquidity.
The Board considers the Bank’s liquidity situation at year end to be good. The Board also considers the ongoing liquidity management of the Group to be good.
Operational risk is defined as the risk of losses due to inadequate or failing internal processes or systems, human error or external events.
The process for managing operational risk must ensure that no single incident can seriously harm Sparebanken Møre’s financial position. The Board has adopted internal guidelines for the area and risk assessments are carried out based on external and internal incidents to which the Bank is exposed.
Sparebanken Møre attaches great importance to external activities that focus on customers. Our employees’ high level of expertise and products that are well-suited to meeting the needs of customers both contribute to the mitigation of operational risk and ensuring that our customers find being a customer of our bank a good experience. All employees who advise customers are authorised via FinAut’s authorisation programmes and must also undergo continuous refreshers in market developments, systems training and training in providing good customer advice. The Bank has also established a product committee that assesses all new products and changes to existing products, as well as regularly evaluates the Bank’s products to ensure that they are suitable for the needs of customers.
The quality and stability of our digital banking services and other ICT services were generally good in 2019. Good cooperation between actors in the industry makes an important contribution to the work on reducing the consequences of targeted attacks aimed at banks and other financial institutions and that is why the Bank is a member of groups such as Nordic Financial CERT. Sparebanken Møre has a strong focus on ICT security, including amongst the Bank’s employees and at the Bank’s service providers. All employees of the Bank must take a compulsory e-learning course in information security, and outsourcing and service providers are regularly followed up. Quality, stability and security will also be focused on heavily in 2020.
There is a heavy focus on money laundering and terror financing in the Group. The Bank carries out a risk assessment of the area annually. A lot of resources are expended on internal control and training employees linked to this area. The work on combating money laundering and terror financing will also be a major focus area in Sparebanken Møre in 2020.
Processing personal data is key to the Bank’s operations. Sparebanken Møre is therefore committed to processing information in accordance with the Personal Data Act. The work is performed in a structured manner in line with internal policies (any discrepancies are dealt with) and by establishing appropriate controls within the area. This will be a focus area in 2020 as well.
Sparebanken Møre’s overarching contingency plan is revised annually. Underlying contingency plans, such as the ICT contingency plan, are also updated on an ongoing basis. Exercises are arranged annually. The experience gained from the exercises is used to supplement contingency plans with additional details and provides valuable experience in managing any crisis situations that could arise. The exercises also help to raise awareness and vigilance in relation to issues that may arise during a crisis.
The Board receives an annual report on the security situation at Sparebanken Møre, in addition to ongoing reports relating to significant deviations and events that may occur. The annual ICAAP reviews the major areas of risk for the Group, and a lot of attention is paid to operational risk in this context.
Sparebanken Møre’s established, operational internal control represents an important tool for reducing operational risk, through both identification and follow-up. The Board believes that the Bank’s overall risk exposure related to operational risk is prudent.
Compliance risk is the ongoing and future risk with respect to earnings and capital related to any breach of, or failure to comply with, statutory or regulatory requirements, or requirements stipulated pursuant to acts and regulations, by the Group.
Compliance risk may result in public sanctions (loss of licence or fines), civil law compensation, and/or compensation for losses in the event of breaches of contract. Compliance risk can also result in loss of reputation, limit business opportunities and reduce the potential for expansion.
Sparebanken Møre’s overall goal for compliance is to ensure that the Group operates in accordance with acts and regulations. Tolerance for deviations must be low.
The main principle for compliance with the regulatory requirements to which Sparebanken Møre is exposed is the sharing of work and liability. This means that the various divisions, staff units, departments and business units have an independent responsibility to ensure compliance with acts and regulations in their day-to-day work.
All employees have an independent responsibility to comply with routines and guidelines established in accordance with acts and regulations, including providing feedback in the event of any discrepancies.
The compliance function must ensure compliance with statutory or regulatory requirements and reports directly to the CEO and Board. The function is responsible for identifying, assessing, monitoring, reporting and advising on compliance risk.
The Board adopts annual compliance instructions and receives quarterly compliance reports. In the opinion of the Board, the Bank’s operations are organised such that the compliance risk is within the adopted risk limits.
Internal control in connection with the financial reporting process
The purpose of internal control in connection with the financial reporting process is to ensure that the financial statements are prepared and presented free from material error. Moreover, internal control shall ensure that external accounting requirements are met, as well as safeguard that information disseminated to analysts, supervisory authorities, investors, customers and other stakeholders is complete and provides a true and fair view of the Group’s financial situation.
Responsibility for the financial reporting process itself is assigned to the Finance and Fascilities Management.
Transactions are registered in the Bank’s core systems, and a reconciliation is performed between these systems and the accounting system (IROS) on a daily basis. Management reports are prepared periodically and quality checked. Any deviations that are recorded are rectified on an ongoing basis. Various management reports are prepared every month, Balanced Scorecard, analyses, risk reports, etc., and consolidation takes place on both a monthly and a quarterly basis. Items in the income statement, statement of financial position and note disclosures are reconciled against various systems and previous reports.
Part of the internal control in connection with reporting the annual financial statements is the cooperation with the external auditor and their audit of the Group accounts.
Quarterly and annual reports are reviewed by the Bank’s management group and the Audit Committee prior to final consideration by the Board and General Meeting.
Internal control reporting
Internal control reporting at Sparebanken Møre is decentralised, with Compliance Management is the coordinating unit. The internal control system is reviewed and verified every year in a process that involves all managers at levels 1, 2 and 3.
The CEO has also submitted an annual report to the Board containing an overall assessment of the risk situation and an assessment of whether the established internal controls function satisfactorily.
The Board has received regular reports on the operations and risk situation throughout the year.
Based on the reports received, the Board believes that internal control is being properly addressed at Sparebanken Møre.
CORPORATE SOCIAL RESPONSIBILITY
Please refer to the separate section on corporate social responsibility and sustainability for information on how Sparebanken Møre addresses and fulfils it responsibilities with respect to human rights, labour rights and social conditions, the external environment and combating corruption in business strategies, day-to-day operations and in relation to stakeholders. Information about working environment and sick leave in Sparebanken Møre is also presented in this section.
The internal auditing function’s remit is to provide independent assessments of the quality and effectiveness of management and control, risk management and internal control, and compliance with relevant laws and regulations.
The Group’s internal auditing was outsourced to EY in 2019. The internal auditing function reports to the Risk Committee and the Board. A plan has been prepared for the work of the internal auditor and approved by the Board. The Risk Committee and the Board received regular reports from the internal auditor in 2019 in accordance with this plan, and no material breaches of relevant laws or regulations were identified.
EQUITY CERTIFICATES AND DIVIDENDS
At year end 2019, there were 5,526 holders of Sparebanken Møre’s equity certificates. 9,886,954 equity certificates have been issued. Equity certificate capital accounts for 49.6 per cent of the Bank’s total equity.
The 20 largest equity certificate holders represented 50.7 per cent of the Bank’s equity certificate capital at year end. Of these equity certificate holders, 11 were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 57.7 per cent (54.3 per cent). Note 29 includes a list of the 20 largest holders of the Bank’s equity certificates.
Sparebanken Møre encourages all employees to own equity certificates in Sparebanken Møre and contributes to this via reward schemes. At the end of the year, employees held 282,804 equity certificates, which makes employees the seventh largest MORG owner overall.
As at 31 December 2019, the Bank owned 25,251 of its own equity certificates. These were purchased on the Oslo Børs at market prices.
The equity certificates are freely negotiable in the market.
Sparebanken Møre’s dividend policy states that the Bank’s aim is to achieve financial results which provide a good and stable return on the Bank’s equity. The results should ensure that the owners of the equity receive a competitive long-term return in the form of cash dividends and capital appreciation on their equity.
Dividends consist of cash dividends for equity certificate holders and dividend funds for local communities. The proportion of profits allocated to dividends is in line with the Bank’s capital strength. Unless the Bank’s capital strength dictates otherwise, it is expected that about 50 per cent of this year’s surplus can be distributed as dividends.
Sparebanken Møre’s allocation of earnings should ensure that all equity certificate holders are guaranteed equal treatment.
In accordance with the requirements of Norwegian accounting legislation, the Board confirms that the prerequisites for the going concern assumption have been met, and that the annual financial statements have been prepared and presented on a going concern basis. This is based on the Group’s long-term forecasts for the coming years.
EVENTS AFTER THE BALANCE SHEET DATE
No significant events have occurred after the balance sheet date that materially affect the annual financial statements as presented.
The county is expected to see moderate production growth going forward. Continued low interest rates, a weak Norwegian kroner exchange rate and growth in our export markets will contribute to this. It appears that the uncertainty surrounding Brexit and the trade war between the US and China has diminished. We still expect good activity within our main industries.
Unemployment in the county has fallen heavily since the beginning of 2017. According to NAV, registered unemployment at job centres in Møre og Romsdal amounted to 2.0 per cent of the workforce at the end of December. In comparison, the national unemployment rate was 2.2 per cent. With moderate production growth going forward, unemployment is likely to remain low throughout the current year.
Growth in household debt in Norway as a whole fell steadily throughout 2019 and ended up at around 5 per cent. The downward trend has been of this magnitude ever since 2012. The growth in lending in the corporate market was more stable in 2019, although the total growth in lending fell slightly during the year.
Competition in our markets, remains strong, both for lending and deposits.
The Bank has noted a somewhat slower pace of growth in lending to the retail market and the corporate market in 2020. There is a constant focus on good operations and increased profitability. A stable deposit growth is expected in 2020.
The Bank will remain strong and committed in supporting our customers.
Sparebanken Møre’s target for cost-effective operations is a cost income ratio of less than 40 per cent.
Sparebanken Møre’s losses are also expected to be low in 2020. Overall, good results are expected in 2020, with a return on equity above the Bank’s strategic target of 11 per cent.
The Board of Directors would like to thank all of the Group’s employees and elected representatives for their good contributions in 2019. The Board of Directors would also like to thank Sparebanken Møre’s customers, investors and other associates for our good partnership throughout the year.
Ålesund, 31 December 2019
26 February 2020
THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE
LEIF-ARNE LANGØY, Chairman of the Board
ROY REITE, Deputy Chairman
RAGNA BRENNE BJERKESET
ANN MAGRITT BJÅSTAD VIKEBAKK
HELGE KARSTEN KNUDSEN
MARIE REKDAL HIDE
TROND LARS NYDAL, CEO